I have an unlisted lead in CA. Now what???

Question

I have a my first (of hopefully many more) lead on an unlisted property here in San Diego. I contacted an owner directly and he seems like he could be convinced on selling his vacant property.

He’s an older retired gentlemen, his concern is capital gains taxes which is understandable (reminds me of my father). I’ll advise him to talk to a tax professional but I told him he may not have to pay IRS capital gains if he is in the 10 or 15% tax bracket, which peaked his interest.

If I can convince him to sell and the property is right for me (haven’t been inside or inspected yet) I want to make this an easy process for him and I don’t want to hit him with a long contract that will scare him off. Anyone have advice on making this an easy but legal transaction for us both?

This is how I see the longer process going. Please advise if I am way off:

A. Get a contract signed so it doesn’t get swooped up by someone else. Not sure what this even looks like. Needs to be simple. Maybe a refundable earnest payment to show him I’m serious? $1000?

B. Get a property inspection/contractor estimates on rehab.

C. Agree to sale/price and terms after I see contractor bids. I may see if he wants to go for owner financing so he can earn interest income to sweeten the deal for him, also so I don't have to worry about getting a loan.

D. Title search?

E. Escrow?

F. Close through escrow

OR can the whole thing be as simple as just getting an inspection on the house and a clear title check then having him sign a quit claim or grant deed, and I write him a downpayment check (if he goes for owner financing)?

Not sure if it's relevant, but I would owner-occupy this house once rehab is complete.

Thank you!

Kevin Fox · Answer

Hey @Rami W.

For the sake of both your financial well-being as well as minimizing the seller's worries; Id recommend drafting up a CA Residential Purchase Agreement and taking the property through a formal escrow.

Shoot me a PM if you want to chat about this.

Austin Mudd · Answer

Also something to note the homeowner can exercise the $250,000/500,000 capital gains tax exclusion from the sale, depending if he's single or married.

http://www.nolo.com/legal-encyclopedia/the-2500005...

* EDIT - leaving that, but re-reading, looks like your lead hasn't been living in the property any time recently. So irrelevant.

What's your exit plan? Are you looking to live in the property for an extended period and sell? Long term ownership?

How are you funded? Hard money? Things to take into consideration because with a lease option you're going to have less holding costs.

Here's some reading: https://www.biggerpockets.com/renewsblog/2013/01/0...

Anthony Dooley · Answer

Read up on how lease/ purchase works. Try to get the option for zero or very little cost since you need to improve the property.

Anthony Dooley · Answer

Yes. And even though you wouldn't own it, you own the exclusive right to purchase it. Therefore if you found another buyer willing to pay more than your agreed price, you could exercise your option and sell it for a profit without ever owning the property.

Rami W. · Answer

@Anthony Dooley never considered improving property I don't actually own! The property also has a 1 or 2 bedroom detached rental in the back that needs a full rehab first and I would get that rented to generate income ASAP before starting the main house. If I was to do a lease-option would I just need to include subletting rights so I can keep the rental income from the rental unit?

Anthony Dooley · Answer

Even better. Do a lease with an option to purchase it for what it is currently worth as is, or less. The longer the option, the better. As you improve the property, the value will go up. Work on traditional financing from a lender once the property is worth at least 20% more than your agreed upon offer.

Rami W. · Answer

Thanks for the responses but I'm not wholesaling the property. I will occupy the property.  @Rick H. @Anthony Dooley

Rick H. · Answer

Before you know what you can pay, you have to know what you can sell it for (or at least the benefits you or the end buyer seeks).

Land is difficult to finance.

What situation will you improve for your seller that you're willing to take responsibility for?

Anthony Dooley · Answer

Find out what he wants. What will make him happy? If taxes are a concern, owner financing is a win/win. Explain the benefits of this to him, ie he doesn't get a lump sum that will push him into another bracket. You can afford to pay  him a higher price if he will agree to finance it himself, plus you will fix it up and increase the value.  The price will be more important to him than the terms. With the right terms, you can put it under contract, fix it up, then sell it without ever owning it. Get creative. Good luck.

I have an unlisted lead in CA. Now what???

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